Banking industry sources last night warned that up to one-third of the UK's stake in the Royal Bank of Scotland could be sold to investors in Abu Dhabi in a deal that could see British taxpayers lose billions of pounds.

The Coalition has reportedly been negotiating for months with sovereign wealth funds in the cash-rich gulf state and is looking to seal a deal by the end of the year.

However, taxpayers, who own 82% of the Edinburgh-based bank, would lose almost half of their investment on any sale near current prices. The shares are trading at barely half the UK Government's average purchase price of 50p.

UK Financial Investments (UKFI), which holds the Treasury's stake, has held regular talks with investors about their views on the industry and RBS, and these included meetings with sovereign wealth investors, including those in Abu Dhabi.

In 2008, Britain undertook a record bailout when taxpayers pumped £45.5 billion into RBS and saved it from collapse. Any deal could see at least 10% and up to 33% of the Government's stake sold.

Abu Dhabi could be attracted to snapping up part of RBS after it made £3bn from investing in rival Barclays during the financial crisis. The main investor then was Sheikh Mansour Bin Zayed al Nahyan, a member of Abu Dhabi's ruling family and owner of Manchester City.

The Treasury said its strategy was to repair and return RBS to full health. "The Government's policy has always been to return RBS to the private sector but only when it delivers value for money for the taxpayer," said a spokesman.

Last night, Mike Trippitt, an analyst at Oriel Securities, said: "I wouldn't be surprised to see a small stake sold at below the in-price [purchase price] but I would be surprised to see a large stake sold."

RBS and UKFI declined to comment.

Politically, there could be a backlash if ministers are seen to be selling the stake too cheaply, although investors and analysts pointed out any sign the Government was considering an exit route would be regarded as good news; it could spark more private sector interest and push up the share price, which closed yesterday at 27.8p, leaving the Treasury sitting on a £20bn paper loss.

The bank is not alone in needing to improve its prospects to get rid of the Government's share- holding. UK taxpayers also hold a 40% stake in Lloyds. At present, the Treasury is sitting on a £10bn paper loss on its original £20bn rescue.